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Strategic direction
Highveld’s corporate vision is to create superior value and benefits on a sustainable basis across commodity cycles for all stakeholders, by developing the business into the world’s leading vanadium products producer, co-producing low cost niche market steel products.
Financial results
Significantly improved market conditions for the Group’s range of vanadium products contributed to more than doubling of headline earnings to R1 722 million from the R866 million achieved in 2004. Operating profit improved significantly to R2 773 million from R1 050 million.
Efforts to further reduce costs and improve efficiencies, yields and output continued during 2005 as part of Highveld’s vision of being a low cost producer. Total cost savings in 2005 were R232 million compared with R264 million achieved in 2004.
The Group’s net borrowing position at year-end was R98 million compared with a net cash on hand balance of R146 million at 31 December 2004. Profit attributable to shareholders for the year was R1 916 million compared with R745 million for the 2004 financial year.This was after a tax charge of R1 136 million 2004: R313 million) and an unanticipated R80 million provision for future environmental rehabilitation and decommissioning costs, arising from the recent approval of the Corporation’s Integrated Water and Waste Management Plans (“IWWMP”) by the Department of Water Affairs and Forestry.
Headline earnings per share increased to 1 739.8 cents, compared with 880.8 cents in 2004. Proceeds from the sale of the Acerinox, S.A. shares and the Group’s shareholding in Columbus Stainless (Proprietary) Limited amounted to 1088.9 cents per share. Total dividends declared for the year, including the special dividends and a final dividend of 400 cents, will amount to 2 830 cents (2004: 440 cents).
Operations
Vanadium
On the back of record steel production worldwide and global vanadium supply difficulties, vanadium reached all-time record prices towards the end of the first quarter and peaked at more than double the previous record price achieved during 1989. In line with reduced steel demand and production, together with improved vanadium supply, prices consolidated and started to decline towards the end of the second quarter, to more sustainable levels. During the third quarter, prices of ferrovanadium, followed by vanadium pentoxide, declined sharply, reaching a low during August before starting to recover. The weighted average price achieved for ferrovanadium in 2005 was US$59 per kilogram vanadium compared with US$20 per kilogram vanadium in 2004.
During the first half of 2005 the Group’s Vanchem operation produced above expected production levels. Production during the second half was adversely affected by a shutdown of kiln no. 3, to complete modifications to the discharge end,and a kiln refractory reline. On the environmental side, a new thickener and slimes dam were commissioned during the second half of 2005 as well as two new ammonia scrubber units. Plans to build a storm water dam and storm water trenches, as well as various waste water treatment projects in line with the IWWMP, were submitted to the Department of Water Affairs and Forestry with work commencing during the second half of 2005.
Steel
World crude steel production of 1.129 billion tons was another all-time record, having surpassed the 1.038 billion tons produced in 2004. China again accounted for most of the increase, with total production of 349.4 million tons, up 24.6 per cent on 2004 production. China now accounts for 31.5 per cent of global steel production. In 2005 India also reflected above average growth, having produced 38 million tons, a growth in output of 16.7 per cent. Demand did not keep up with this growth in steel output, leading to price reductions during the year.
Total steel despatches in the South African market declined by 7 per cent from 2004 and by comparison, the Group's despatches were 6.7 per cent down on 2004. The prospects over the medium-term are, however, positive, given the number of capital projects that have been announced for infrastructural improvements, mining projects and the 2010 Soccer World Cup. The decision earlier in 2005 to supply grade 350WA steel as the new standard for structural steel into the local market appears to have been well received by consumers.
Since the successful commissioning of furnace no. 5 to the new open slag bath configuration at the Iron plant, the furnace has produced iron and vanadium above expectations. Due to this conversion, the Iron plant only operated six furnaces for six months, which impacted on iron and vanadium production. It is currently planned to convert furnace no. 6 during 2006.
Ferro-alloys
The weakening of the ferro-alloy markets during the latter part of 2004 continued throughout 2005, resulting in a decision to switch all furnaces off during the winter months at both Transalloys and Rand Carbide.
Safety, Health, Environmental and Quality
With deep regret it is reported that a fatal accident involving an employee occurred during the year.The Group remains fully committed to a safe working environment and continuously strives to improve its practices and systems so as to achieve zero injuries on a sustainable basis.This has resulted in the Group, including contractors, making progress in reducing the lost time injury frequency rate by 42 per cent to 0.22 for the year, a world-class performance.
On the environment and quality fronts, ISO 14001 and ISO 9001 re-certification audits were conducted by the certification authority within the Group and the certification was maintained. The implementation of the OHSAS 18001 Safety Management System continued, as well as integration thereof with other management systems. It is envisaged that this process will be finalised with certification audits during 2006.
Investments
During the year the Group disposed of its 12 per cent interest in Columbus Stainless (Proprietary) Limited and its holding of 2.9 per cent in Acerinox, S.A.The total proceeds realised amounted to R1 076 million which resulted in a profit on sale of R243 million.
Capital expenditure
Capital expenditure for the year, aimed mainly at improving the Group’s production costs and at addressing environmental requirements, amounted to R624 million (2004: R421 million).The total commitment in respect of further capital expenditure as at 31 December 2005 was R582 million (2004: R314 million). This expenditure will be funded from internally generated cash flows and available borrowing facilities.
Transformation
Transformation forms an integral part of the Highveld business strategy and is a focus point for managing the business.The importance of transformation is evidenced by the amendment, in 2005, of the Board Charter to extend the responsibilities of the Employment Equity Committee. In line with these new responsibilities, it was renamed the Transformation Committee. This Committee is now responsible for the full spectrum of the Group’s transformation activities and programmes.This includes not only compliance with the Broad-Based Socio-Economic Charter for the Mining Industry and the Broad-Based Black Economic Empowerment Act, but also ensures that the spirit of transformation is conveyed – within the Group and outside – in aspects such as its supply chain and community projects.
Directorate
Trevor Jones retired as non-executive Chairman of the Group with effect from 31 March 2005. On behalf of the Highveld Board, we extend our appreciation to him for his significant contribution during his 37 years with the Corporation and for the leadership role he played most recently as non-executive Chairman.The Board wishes him well in his retirement.
Anglo American plc announcement
Shareholders were advised of the intention of Anglo American plc to sell its approximate 79 per cent shareholding in Highveld in line with its future business strategies and objectives. The directors have been advised by Anglo American plc that advisors have been appointed for the sale process and that non-binding bids from a number of interested parties have been received. Participants in this process will commence their due diligence investigations in the coming weeks.The Board of Highveld has appointed a committee of independent directors to advise it on matters relating to this sale as it affects Highveld. This committee has appointed Standard Bank to carry out a valuation and a fair and reasonable exercise once a final binding bid is received.
Outlook for 2006
Despite announcements and speculations of new capacity, the global supply and demand fundamentals for the vanadium market have not changed significantly in recent months.The demand for vanadium products is likely to remain stable but the price levels seen in 2005 are not expected to be repeated in 2006. A strong improvement in domestic demand for Highveld’s steel products is expected in 2006, supported by stable interest rates and an upswing in new construction and industrial projects.
It would appear that global steel demand in 2006 will remain weak. However, production cuts announced by some major international producers should counteract the impact on prices.The current strength of the Rand will continue to place pressure on export margins. Taking into account the above factors, Highveld’s 2006 operating performance is not anticipated to match the levels achieved in 2005.
The Group’s cost savings programme continues to yield positive results and it is expected that further savings will be achieved in 2006. The Group’s restructuring and continuing capital expenditure programmes are also well advanced and should assist in achieving improved operational efficiencies and cost savings.
In conclusion, the Board thanks the executives, management and all the Highveld employees for their efforts and dedication, which contributed to the success achieved in 2005.
For and on behalf of the Board
G G Gomwe – Chairman Witbank
A J de Nysschen – Chief Executive Officer
1 February 2006
See complete set of results on Highveld Steel website:
http://www.highveldsteel.co.za
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